Yield Curve Construction with Treasuries

The Treasury bond yield curve can be built from several different sources:

• On the Run Treasuries: This entails plotting the observed yields from the most recently issued Treasuries.
• On the Run + Selected Off the Run Treasuries: On the run issues may not cover the all time periods needed, particularly for longer maturities, so off the run issues may be incorporated into yield curve construction.
• All Treasuries: This is a complete picture of the yield curve, but some issues, such as those which are callable, would need to be excluded.
• Treasury Coupon STRIPS (separate trading of registered interest and principal securities): interest coupon STRIPS can be used to construct the yield curve, but this approach has the following deficiencies:
• Liquidity: Lower than liquidity of coupon paying bonds.
• U.S. Taxes: Tax treatment may be different for STRIPS.
• Foreign Taxes: Principal strips and coupon strips may be treated differently for taxation purposes in foreign countries.